Internet giant Yahoo (NASDAQ:YHOO) is expected to report its Q3’15 results next week and attract a lot of attention from the tech industry and financial sector. In the recent weeks, Yahoo has been heavily involved in managing the long-awaited Alibaba (NYSE:BABA) spin-off that is expected to take place during the fourth quarter of 2015. Yahoo plans to spin off its holdings in Alibaba together with its small businesses division into a new publicly traded company named Aabaco. Yahoo is trying to complete this spin-off as a tax-free transaction and has requested for the IRS to provide a preliminary ruling in that matter. However, the IRS’s refusal pulled Yahoo’s stock into a rollercoaster mode and attracted too much attention from the company’s executives until the company officially announced that it is proceeding with the tax-free spin-off based on a piece of Skadden Arps advice.

The developments in the Alibaba spin-off received most of the attention from investors and the financial sector; however, Yahoo also has a lot to prove in its core business performance after the disappointing results of Q2. In Q2, Yahoo reported revenues Ex-TAC of $1.04B, which was $10M below estimates, and $0.16 EPS, which was $0.02 below estimates. Moreover, Yahoo provided a disappointing guidance of $1.02B, which was lower than the consensus analysts’ expectations of $1.07B. On the spending side, Yahoo presented a disappointing 4x increase in Traffic Acquisition Costs YoY to a quarterly amount of $200M, which was expected to grow up to $250M in Q3’15, according to Yahoo’s guidance.

As shown in Chart 1 below, Yahoo’s revenues are declining and this is expected to slow down and start changing course in Q3’15. If a successful tax-free spin-off is Yahoo’s biggest challenge in its non-core business, executing better than expected results with a significant turnaround is Yahoo’s largest challenge within its core business.

Yahoo’s stock is currently trading 40% below analysts' average target price of $44, mainly due to the uncertainty around the Alibaba spin-off and the disappointing core business performance. As the company has already addressed the Alibaba spin-off successfully, the second challenge will receive higher importance in the upcoming Yahoo earnings release.

Within the core business, investors will be looking at Yahoo's progress in the search and display ads revenue as well as any positive developments in Yahoo’s mobile and social portfolio. In the non-core business, the Yahoo Japan stake will probably attract attention as in the previous conference call, as investors wonder louder than before if Yahoo’s strategy regarding the Yahoo Japan stake is not clear.

These are Yahoo’s comparable figures to watch in this earnings:

Q315 Guidance

Q3’15 Consensus

Q314

Revenues

$1,250

$1,260

$1,148

Revenues Ex-TAC

$1,020

$1,030

$1,094

Adjusted EBITDA

$220

N/A

$306

Non-GAAP Operating Income

$70

N/A

$42

EPS

N/A

$0.17

$0.52

Source: Yahoo IR, Yahoo Finance, WSJ

Conclusion

Yahoo is stepping into the earnings season with its focus on the Alibaba spin-off. However, analysts and investors expect a decent improvement in core businesses regardless of the non-core developments in Alibaba and Yahoo Japan. The market sentiment is negative towards Yahoo after the infamous Barron’s article, the struggle to complete the Alibaba spin-off, and the declining core revenues. Investors are worried that once Alibaba is spun-off, Yahoo’s core business will not generate much revenue nor create value for shareholders. In this earnings event, just before the Alibaba spin-off, Yahoo and CEO Mayer have their biggest test: to prove that the market sentiment is wrong.

Yahoo Stock Articles & Video

Google continues to launch new applications to innovate and acquire new revenue streams. EU antitrust charges on android is a major concern, which may affect the stock price in the short term. Valuation shows some mixed signs - the stock appears to be relatively inexpensive but may also not a bargain.

Yahoo shares have been sliding since the company uncovered a massive data breach. Verizon, which had agreed to purchase Yahoo's core, is likely to use this revelation to renegotiate the price lower. After gaining nearly 30% YTD, do Yahoo shares have any upside left?

Verizon will acquire Yahoo's operating business for $4. 83 billion in cash. The acquisition follows the 2015 acquisition of AOL. Yahoo web properties, including email, News, Sports and Finance, have 200 million unique monthly visitors, many of them on mobile devices. Verizon wants to be a top global mobile media company, and accelerate its revenue stream in the $187 billion digital advertising market.

Yahoo reported Q2 earnings and refused to disclose further info about the sale process. The Mozilla payment clause, Tumblr write-off, and weak core results put pressure on the deal price. Even though the sale will be closed soon, investors should be ready for a downside scenario.

After an endless process to sell the company’s core business, Yahoo is finally approaching the end. Yahoo will announce the third bidding round results and acquisition terms. Operating results are secondary to the selling process announcement.

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